One month after President Bush reluctantly signed legislation requiring the government to auction the rights to make student loans, the Education Department is calling the new program unworkable and inflexible. Even some proponents of auctions agree, while the loan industry says that the plan will hurt borrowers by narrowing their lender choices.

The auction program is included in the College Cost Reduction and Access Act that Bush signed on September 27 despite a veto threat. The bidding requirement attracted little attention when Congress debated the legislation, as headlines focused on scandals involving cozy relationships between loan providers and college officials. Yet it could fundamentally change the way the government supports education loans. ...

The law requires the Education Department to run a separate auction in each state every two years in which lenders would bid for the right to make guaranteed loans to parents. Known as PLUS loans, they represent about 17 percent of the Federal Family Education Loan Program, according to the department.

In each auction, the two lenders willing to accept the lowest subsidy rate would win the exclusive right to make PLUS loans in the state where the bidding took place. The winning lenders would be legally obligated to make loans to all eligible borrowers. Senate Health, Education, Labor, and Pensions Committee Chairman Edward Kennedy, D-Mass., came up with the plan, which is expected to save the government $2 billion in subsidies to lenders. Auctions are scheduled to begin on July 1, 2009. ...

The New America Foundation did not back the Senate pilot model, but Education Policy Program Research Director Jason Delisle said that the think tank considered it better than the current approach. "This is a foot in the door. We get to see the concept in practice," he said.

The groups that support an auction favored the House's proposal, which was written by Rep. Tom Petri, R-Wis., in consultation with the New America Foundation. It called for the Education and Treasury departments to study various auction models in a two-year pilot program that would involve as much as 20 percent of all guaranteed student loans. Petri's plan would have authorized the Education Department to extend the successful model to the entire federal program. ...

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